Tell me again why anyone would make use of a hedge fund?Today's WSJ has an article indicating the average college endowment fund returned minus (that's a negative) 0.3% in the 12 months ending June 2012, badly trailing the returns posted by both equities and fixed income. The same endowment funds returned an average of 1.1% annually over the last five years and 6.2% over the last decade, net of fees.

Basically, the article goes on to say that the average endowment fund holds 15% in U.S. equities versus 54% in alternatives. The largest endowment funds those with more than $1Billion in assets, posted the best returns, gaining 0.8% in fiscal 2012 and an average of 7.6% annually over the past 10 years. The smaller endowment funds with $51 million to $100 million in assets lost 1% last year and returned an average of 5.7% annually over the last 10 years.

My interpretation - the average Boglehead could vastly outperform those who proclaim themselves to be "investment experts".

Please pay attention to the date range here. 7/1/2011-6/30/2012 or was it 6/1/2011 to 5/30/2012? No matter. The US stock market was roughly flat for those time periods while the int'l stock market was down about 18%.

I think most of you would be happy with a 0% return given the actual history of the 3-fund portfolio during that time period.

Grt2bOutdoors wrote:My interpretation - the average Boglehead could vastly outperform those who proclaim themselves to be "investment experts".

livesoft wrote:Please pay attention to the date range here. 7/1/2011-6/30/2012 or was it 6/1/2011 to 5/30/2012? No matter. The US stock market was roughly flat for those time periods while the int'l stock market was down about 18%.

I think most of you would be happy with a 0% return given the actual history of the 3-fund portfolio during that time period.

Grt2bOutdoors wrote:My interpretation - the average Boglehead could vastly outperform those who proclaim themselves to be "investment experts".

Probably not, because you have the word "vastly" in there.

While the article talked about the 1 year returns, I tend to focus on the longer term returns of 5 and 10 years. Those are more telling, endowment funds by their very nature are designed to be long-term vehicles - they can exist in perpetuity. Given that, viewing the longer term performance irons out the 1-3 year blips of under/over performance by any one asset class or sector. A 5.7% annual return over ten years, net of fees is not something someone should be crowing about, especially given the amount of risk taken to achieve it.

I really don't think it's fair to compare short term returns of an endowment to one of our personal portfolios and reach any particular conclusion. Though it's certainly interesting, it doesn't prove one's superiority over another. It's the same argument used against someone who is performance chasing - looking at the last 50 ft in the rear view mirror vs the long road ahead tells us little. Someone recently posted returns of a ML dividend portfolio and all the comments pointed to performance chasing since it vastly outperformed. The same argument holds true here, with opposite results.

An endowment invests with an infinite time horizon and uses some investments with nearly zero liquidity and no correlation to equity or fixed income markets. As such (of course) there will be periods (for better or worse) when the returns are vastly different than your/my portfolio.

To be fair, for the 12 months through 6/30/12, bonds and large US stocks were about the only thing that did well. US small, Int'l, EM, etc. did pretty poorly. Based on similar FY 2008 returns, I find that an 80/20 mix of stocks and bonds is the closest comparable index to these pools of $. In the 12 months ending 6/12, a 56% Russell 3000, 24% MSCI All Country World exUS Index, and 20% Barclays Aggregate Bond Index earned +0.3% (compared to CE return of -0.3%). In the last 5 years, the index mix earned +1.0% (compared to +1.1% for CEs), and in the last 10 years, the index mix earned +6.4% compared to +6.2% for CEs). All in all, these investors are large enough ($400B) that they are the market, so its no surprise that they trail the market returns by their approximate costs (probably 0.2% to 0.3% over time).

The biggest endowments did a bit better over the last decade (+7.6%), but we also know the biggest endowments take significantly greater alternative and private asset risks. Simply tilting the market index portfolio mentioned above to small and value stocks and holding just 5YR T-Notes to more reliably dampen risk produced returns of almost 2% per year more (+9.4%).

One or two endowments may surprise and do exceptionally well, but as a group they underperform the market just like every other active investor.

DaleMaley wrote:But if you just bought index funds, then no hedge fund guys to wine and dine you

Don't laugh, but that's exactly what happens. The investment group within the college gets taken to meetings (with family) to really nice vacation spots in order to discuss investment strategy for a week or so, fully paid for by the hedge fund or investment advisor. There's real money to be made ripping off large pools of money, so don't be surprised by anything.

1. The "gurus" running the fund realize now there is no way they can meet their target return in the short term betting on the equity or fixed income markets and get lured by the "consistent' return of alternatives despite how the economy is doing OR

2. Hedge funds have realized (and good for them) that these managers of endowments are not that bright and have deep pockets. A very dangerous combination!!

If I was a hedge fund I would have done this YEARS ago.

Good luck.

...we all think we're above average investors just like we all think we're above average dressers... -Jack Bogle

DaleMaley wrote:But if you just bought index funds, then no hedge fund guys to wine and dine you

Don't laugh, but that's exactly what happens. The investment group within the college gets taken to meetings (with family) to really nice vacation spots in order to discuss investment strategy for a week or so, fully paid for by the hedge fund or investment advisor. There's real money to be made ripping off large pools of money, so don't be surprised by anything.

Agreed 100%.

One of the big philosophies I live on in my personal life is never trust anyone who is too nice or throw too many surpalitives your way. It usually means they are trying to shake your hand while reaching for your wallet with the other hand!!

Good luck.

...we all think we're above average investors just like we all think we're above average dressers... -Jack Bogle